Fair Lending Risk Management
Presented by:
Martin (Marty) Mitchell, CRCM
Managing Director, ProBank Austin
Robert J. (Bob) Mullenbach, CRCM
Managing Director, Compliance Division Deputy, ProBank Austin
Fair Lending Laws
• ECOA
• Prohibits discrimination in any aspect of a consumer credit transaction (including
Small Businesses, Corporations, Partnerships, and Trusts)
• Fair Housing
• Prohibits discrimination in residential real-estate related transactions which
include:
• Making loans to buy, build, repair or improve a dwelling;
• Purchasing real estate loans;
• Selling, brokering, or appraising residential real estate; and
• Selling or renting a dwelling.
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Regulation B
• Regulation B also requires lenders to do the following:
• Notify applicants of the credit decision within 30 days of receiving a
completed application.
• Retain records of credit applications for 25 months after notifying the
member of its credit decision.
• Collect information about the applicant's race and other personal
characteristics in applications for certain dwelling-related loans.
• Provide applicants with copies of appraisal reports used in connection
with credit transactions.
• Regulation B also prevents lenders from discouraging prospective
applicants from making or pursuing an application.
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Applicability
• ECOA and Fair Housing cover all phases of the lending process:
• Applications;
• Loan closings; and
• Post loan closing – including servicing and loss mitigation
activities.
• ECOA and Fair Housing apply to financial institutions and any
third parties engaged by financial institutions.
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Fair Lending Laws and
Protected Classes
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Laws Description Protected Class
Applies To
Fair Housing Act (FHA)
Makes discrimination illegal in connection with any housing-related transaction
Race, color, religion,handicap,familialstatus, national origin
Loans that involve a dwelling;Transfers of loans that involve a dwelling;Selling, buying, renting, brokering or appraising a dwelling
Fair Lending Laws and
Protected Classes
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Laws Description Protected Class Applies To
Equal Credit Opportunity Act(ECOA)
Makes discrimination illegal in connection with credit or lending transaction
Race, color, religion,sex,marital status, age, national origin, income from public assistance, exercise of rights under Consumer Credit Protection Act
Every aspect of a any credit transaction
Fair Lending Laws and
Protected Classes
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Laws Description Data Points Applies To
Home Mortgage Disclosure Act(HMDA)
Requiresreporting of residential lending data
Race, ethnicity,sex, income, action taken, HOEPA, lien status, rate spread, property location
Homepurchase, home improve-ment,refinancing
Prohibited Bases
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ECOA
- Marital Status
-Age
-Public Assistance
-Exercise of Rights under CCPA
ECOA and Fair Housing
- Race or Color
-Religion
-National Origin
-Sex
Fair Housing
-Handicap
-Familial Status
Prohibited Acts
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• Fail to provide information or services or provide different information or
services regarding any aspect of the lending process, including credit
availability, application procedures, or lending standards
• Discourage or selectively encourage applicants with respect to inquiries
about or applications for credit
• Refuse to extend credit or use different standards in determining whether to
extend credit or vary the terms of credit offered, including the amount,
interest rate, duration, or type of loan
• Use different standards to evaluate collateral
• Treat a borrower differently in servicing a loan or invoking default remedies
• Use different standards for pooling or packaging a loan in the secondary
market.
Prohibited Acts
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A lender may not express, orally or in writing, a preference based on prohibited factors
or indicate that it will treat applicants differently on a prohibited basis. A violation may
still exist even if a lender treated applicants equally.
A lender may not discriminate on a prohibited basis because of the characteristics of:
• An applicant, prospective applicant, or borrower
• A person associated with an applicant, prospective applicant, or borrower (for
example, a co-applicant, spouse, business partner, or live-in aide)
• The present or prospective occupants of either the property to be financed or
the characteristics of the neighborhood or other area where property to be
financed is located.
Persons With Disabilities
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The Fair Housing Act requires lenders to make reasonable accommodations for a
person with disabilities when such accommodations are necessary to afford the
person an equal opportunity to apply for credit.
Applications
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Lenders are encouraged to use industry standard form applications. A lender choosing
to use a non-standard credit application form should obtain a legal opinion stating the
forms comply with the applicable legal requirements. The application may require any
information, except for information about the applicant’s:
• Spouse, unless the spouse will use or is contractually liable on the account or
the applicant relies on the spouse’s income
• Marital status when applying for unsecured credit when applying for secured
credit, the application may use only the terms married, unmarried, or separated
• Sex, race, color, religion, and national origin *
• Childrearing or childbearing, such as birth control practices, intentions, or
capability to bear children
Examples of Overt Discrimination
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• Including explicit prohibited basis identifiers in the institution’s written or oral policies
and procedures (underwriting criteria, pricing standards, etc.)
• Collecting information, conducting inquiries or imposing conditions contrary to
express requirements of Regulation B.
• Including variables in a credit scoring system that constitute a basis or factor
prohibited by Regulation B or, for residential loan scoring systems, the FHA.
• Statements made by the institution’s officers, employees or agents which
constitute an express or implicit indication that one or more such persons have
engaged or do engage in discrimination on a prohibited basis in any aspect of a
credit transaction.
• Employee or institutional statements that evidence attitudes based on
prohibited basis prejudices or stereotypes.
Three Types of Illegal Discrimination
Disparate Treatment
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• Occurs when a lender has neutral credit policies and criteria, but applies
them inconsistently, in a way that adversely impacts borrowers on a
prohibited basis.
• A bank requires automobile loan customers to have monthly debt
payments of less than 40 percent of gross monthly income. If the bank
denies a female applicant based on that rule, but makes a policy
exception and approves a male applicant in similar circumstances, this
may be disparate treatment.
• Lenders often have a legitimate, business-related reason to "bend the
rules" for a particular applicant. If this is the case, it is possible that no
violation of fair lending law occurred.
Three Types of Illegal Discrimination
Disparate Impact
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• Occurs when a lender adopts a neutral policy, applies it consistently, but the
policy causes a "disproportionate adverse impact" on a prohibited basis.
• A bank adopts a minimum loan amount for home mortgage loans. This
minimum is so high that few minority, single or elderly applicants qualify
for loans in the bank's market area due to their incomes or the local
home values. This may constitute disparate impact.
• A policy or practice that creates a disparity on a prohibited basis is not
necessarily proof of a violation. The apparent disparate impact may be
legal if there is a business necessity for the policy or practice, and there
is no alternative policy or practice that is less discriminatory.
Prohibited Practices
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A lender may not discriminate on a prohibited basis by considering the
characteristics of:
• An applicant, prospective applicant, or borrower;
• A person associated with an applicant, prospective applicant, or
borrower;
• The present or prospective residents of the property to be financed; or
• The neighborhood where the property to be financed is located.
How Discrimination Occurs
in Underwriting
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• Examiners compare credit-underwriting decisions to find apparent disparate
treatment.
• A lender that approves a loan to a married applicant with a two-year-old
bankruptcy, but denies applications from unmarried applicants with
much older bankruptcies.
• Examiners focus their review on "marginal" applicants, who are neither
clearly qualified, nor clearly unqualified, for credit. Lenders usually need
to exercise judgment or provide extra assistance to qualify marginal
applicants for credit, and discrimination may be more likely in these
cases.
Indicators of Discrimination
in Underwriting
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• Substantial disparities among the approval/denial rates for applicants by
monitored prohibited basis characteristic (especially within income
categories)
• Substantial disparities among the application processing times for
applicants by monitored prohibited basis characteristic (especially within
denial reason groups)
• Substantially higher proportion of withdrawn/ incomplete applications from
prohibited basis group applicants than from other applicants
• Vague or unduly subjective underwriting criteria
• Lack of clear guidance on making exceptions to underwriting criteria,
including credit scoring overrides
Indicators of Discrimination
in Underwriting
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• Lack of clear loan file documentation regarding reasons for any exceptions
to standard underwriting criteria, including credit scoring overrides
• Relatively high percentages of either exceptions to underwriting criteria or
overrides of credit score cutoffs
• Loan officer or broker compensation based on loan volume (especially
loans approved per period of time)
• Consumer complaints alleging discrimination in loan processing
How Discrimination Occurs
Terms and Conditions
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• If a financial institution approves a loan but imposes higher interest rates or
excessive fees on a prohibited basis, the financial institution may have
violated the Equal Credit Opportunity Act (ECOA) or the Fair Housing Act
(FHA).
• The examiner will need to investigate whether a nondiscriminatory
reason, such as risk-based pricing, accounts for the difference.
• The Justice Department has settled several ECOA and FHA lawsuits
with lenders, often citing discriminatory credit pricing.
Indicators of
Pricing Discrimination
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• Financial incentives for loan officers or brokers to charge higher prices:
interest rate, fees, points.
• Financial incentives are accompanied by broad pricing discretion such as
through the use of overages or yield spread premiums.
• Presence of broad discretion in loan pricing (including interest rate, fees
and points), such as through overages, underages or yield spread
premiums. Such discretion may be present even when institutions
provide rate sheets and fees schedules, if loan officers or brokers are
permitted to deviate from those rates and fees without clear and objective
criteria.
Indicators of
Pricing Discrimination
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• Use of risk-based pricing that is not based on objective criteria or applied
consistently
• Substantial disparities among prices being quoted or charged to applicants
who differ as to their monitored prohibited basis characteristics
• Consumer complaints alleging discrimination in residential loan pricing.
• In mortgage pricing, disparities in the incidence or rate
• A loan program that contains only borrowers from a prohibited basis group,
or has significant differences in the percentages of prohibited basis groups.
Redlining General Concepts
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• The avoidance of segments of the bank’s market area in providing banking
products and services.
• A complete absence of activity is not the standard – disproportionately
lower levels will raise concerns during reviews.
• Within the Context of the Bank’s Defined Market Areas, examiners will look
for:
• Lending Patterns
• Branch Structure
• Advertising
• Reverse Redlining – high percentage of loans with less advantageous
features in high minority areas
Steering
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• Steering is the placement of a customer in a product.
NOTE: Steering can occur even if it doesn’t involve a less favorable product.
NOTE: May occur when the institution offers the same product in various lending
channels that price or underwrite the product differently, i.e., portfolio vs.
mortgage subsidiary products.
How Discrimination Occurs
Steering
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• "Steering" generally occurs when a lender refers applicants to a less favorable
credit product than they qualify for.
• May raise fair lending concerns if it puts prohibited-basis customers at a
disadvantage.
• Lenders steer minority customers to FHA home mortgage loans even
when they should qualify for lower-priced conventional credit.
• Examiners review the institution's policies and practices for referring
customers to various products. If individual lenders can refer customers to
different credit products, examiners evaluate whether the lenders use their
discretion in a nondiscriminatory manner.
ECOA Targeted Review
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• Generally focus on a specific product; e.g. mortgages or auto lending.
• Statistical analysis
• File review
Indirect Auto Lending
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• Other than a home, a car or truck is often one of the largest purchases a
consumer makes in his or her lifetime.
• Third largest market in terms of loans outstanding in the consumer financial
marketplace, behind only mortgages and student loans. In 2013, outstanding
auto loan balances were approximately $863 billion, with over $355 billion
originated during 2013.
• Auto lenders fall under the CFPB’s supervisory or enforcement jurisdiction.
This includes financial institutions, like banks, credit unions, captive auto
lenders, and certain nonbank companies.
HMDA Data Integrity Review
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• Essentially, HMDA compliance examination.
• Inaccurate HMDA data may lead to resubmission of HMDA data for one or
more years.
• May also lead to fair lending enforcement action.
Fair Lending Risk Assessment
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• Program – Procedures - Practices
Fair Lending Risk Assessment
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• Program:
• Clear written policies and procedures
• Management oversight
• Consistent with FFIEC Interagency Fair Lending
Examination Procedures
Board and Management
Oversight
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Risk Assessment
Know Your Products
Oversight
Know Your Data
Fair Lending Compliance
Program
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Policies and
ProceduresMonitoring Training
Corrective Action
Monitoring
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• Compliance audits should include a process to:
- Report findings to appropriate leadership and managers,
- Respond to exceptions,
- Implements corrective action, and monitors the results of
corrective action.
• Self-evaluations and Self tests
- Recommended for most banks as a way to review the results of
lending activities to identify any risk indicators or areas of
concern.
Training
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• Best practices include a formal fair lending training program,
tailored to the institution that includes:
- Board of Directors
- New employees
- Third-party providers
- Programs specific to employee function
- Applications, closings, foreclosures and debt resolution
- Marketing, advertising and signage
Common Violations
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• Making loans with different pricing and terms to similarly situated
applicants with no apparent explanation
• Failing to establish/update/comply with board-approved
underwriting and pricing standards
• Lack of centralized underwriting/local decision-making authority
with inadequate oversight
• No secondary review process
• Overt or misstatements in lending policies
• Redlining
• Steering
Common Violations
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• HMDA violations that can lead to a targeted fair lending exam:
• Failure to collect government monitoring information (GMI)
• Requesting information about the applicant’s spouse when not
applying for joint credit
• Failure to include alimony, child support, public assistance, and
other separate maintenance when calculating applicant income
• Data errors
• ECOA/ Reg B - failure to provide adverse action notices in a timely
manner
Conclusion
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• Equal treatment of loan applicants is a serious issue for the
regulators and should be a serious issue for all lending institutions.
• Significant liability can be incurred through unintentional illegal
discrimination.
• Multicultural awareness, race, gender, and handicap sensitivity
training is not a joke and institutions that expect to survive and
thrive should takes proactive steps to make this part of their
corporate culture and identity.
• The “tone at the top” is crucial to success.
Martin (Marty) Mitchell, CRCM
Managing Director, ProBank Austin
6200 Dutchmans Lane, Suite 305
Louisville, Kentucky 40205
(800) 523-4778, Ext. 258
www.probank.com
Robert J. (Bob) Mullenbach, CRCM
Managing Director, Compliance Division
Deputy, ProBank Austin
6200 Dutchmans Lane, Suite 250
Louisville, Kentucky 40205
(800) 523-4778, Ext. 258
www.probank.com